Ensuring a strong United States position in the semiconductor sector was at the center of US President Joe Biden’s political agenda. The country’s strategic focus on this area is not new, but the challenges facing the Biden administration are unprecedented.
To understand the extent of these problems, it is necessary to analyze the history of US dominance in the field of semiconductors. The United States led the way in the development and production of semiconductors, which proved vital to their national security throughout the post-war period. the US leadership was challenged only briefly in the late 1980s due to the rise of Japanese semiconductor firms. US chip makers fast won relying on innovation rather than protectionism, which solidified US dominance in the sector by the early 1990s.
Central to this dominance was the formation of a global value chain (GVC) for the semiconductor sector. Technological developments, especially in electronic design automation (EDA) software and chip design automation, have led to the emergence of factory-free manufacturing, which has focused on design and sales, and the actual semiconductor manufacturing has been outsourced. The rapid emergence of semiconductor manufacturing firms in East Asia that provide chip fabrication services has allowed leading American firms to focus on chip design while taking advantage of Asia’s relatively cheap skilled labor force.
With a strong national innovation system, American chip makers (including Broadcom, Qualcomm, Nvidia, and AMD) are rapidly entered Top end of the value chain. Given the growing value of semiconductor design, innovation in the chip industry, and the importance of ICs and intangible assets in the global ICT ecosystem, US firms have quickly become dominant players in the semiconductor sector. Meanwhile, East Asian and European semiconductor companies, which occupied the mid-GCC segment, became suppliers to US semiconductor companies.
US dominance in the semiconductor sector is clearly reflected in the monopoly on semiconductor design software. EDA tools are mainly supplied by three American companies: Cadence Design Systems, Synopsys and Mentor Graphics (acquired by Siemens in 2017). Without these US-made tools, it would have been impossible to develop modern chips, which explains why the Biden administration’s latest move Export Control Policy towards China so effective.
It is clear that US dominance in the global semiconductor sector was based on its power to occupy the top GVC positions. However, what the Biden administration is trying to achieve is much more ambitious than what the US has previously achieved.
The United States is determined to defend its absolute dominance at the top of the semiconductor GCC, and momentum is building for industrial policy to support the domestic chip industry. Industrial policy proposals have appeared in Congress since the end of the Trump administration, and in mid-2020, several bills were proposed to provide financial incentives to boost the semiconductor industry. United States Innovation and Competition Actwhich includes $52 billion in federal investment in domestic semiconductor research, design, and manufacturing in the CHIPS for America fund. counts as the first step towards preventing Chinese domination.
However, Biden is aiming for more than just maintaining the lead at the top of the GVC. Since taking office in January 2021, he has prioritized both the competitiveness and security of the country’s semiconductor sector. 100 Day Comprehensive Supply Chain Review published by White House in June 2021 outlined the US vision to achieve both “leadership” and “sustainability” in the global semiconductor value chain.
The Biden plan requires the US to pay attention to the middle and lower levels of the GVC. This strategy is currently being implemented in two ways. The first is to team up with global semiconductor firms to shift production by building domestic manufacturing facilities. Intel announced a bold “IDM 2.0” strategy to restore its advanced manufacturing capabilities and offer foundry services to other companies. At the urging of the US government, both Taiwan Semiconductor Manufacturing Co. (TSMS) as well as Samsung also announced plans to expand manufacturing capacity in the US.
Second, the intention of the Biden administration to work with like-minded countries to build a more robust semiconductor supply chain that does not include China. Increasing the resilience of the US semiconductor supply chain is a major component of the recently announced Indo-Pacific Economic Framework (IPEF), an initiative designed to promote economic cooperation with Washington’s Asian allies.
Despite its national security implications, the United States’ ambitious plan to tackle the supply chain crisis is likely to undermine its current dominance in the global supply chain segment. In particular, the Biden administration faces two main challenges. First, a security-oriented “self-sufficiency” policy that focuses on the entire value chain will inevitably disrupt the current global semiconductor fabrication system, incurring significant economic costs and diverting economic resources that could be used to strengthen the US position at the top level. .
In order to establish semiconductor manufacturing onshore, the Biden administration will first have to address manufacturing issues. work force which no longer exists in the United States, and the lack of infrastructure needed to restore production capacity.
Perhaps an even bigger problem is the cost of production. The formation of GVC semiconductors has allowed US companies at the higher end of the value chain to obtain the best manufacturing capacity at the lowest economic cost, thus starting an effective cycle of technological breakthroughs and innovations. This will no longer be the case when Biden decides to bring production back. BUT report The Boston Consulting Group shows that the costs associated with running a factory in the US for 10 years would be about 30% higher than in Taiwan, South Korea, or Singapore, and about 37% to 50% higher than in China. Given the huge economic costs, the return of production to the United States easier said than done.
Second, the US strategy to supplement domestic production through collaboration with its technological allies could further undermine the semiconductor GDC. Biden sought to form techno alliances with leading companies in East Asia to improve the sustainability of the supply chain. The effectiveness of this security-oriented strategy, which runs counter to economic considerations, depends on Washington’s diplomatic ties with its allies. Biden’s security-focused supply chain restructuring efforts could affect relationships between US companies at the top of the value chain and their suppliers in the middle and bottom.
The anxiety of government and capital is becoming more and more evident in East Asia. Japanese government, for example, is concerned that the return of US production could devastate production in East Asia as a whole, making Japan’s ambitions to reassert its dominance in the semiconductor industry by 2030 unlikely. In Taiwan, TSMC founder Morris Chang also expressed skepticism about US onshore efforts.
In short, the supply chain problem is forcing the Biden administration to overstretch US semiconductor power. The ambitious project to change the global semiconductor sector will require a national mobilization and a series of diplomatic actions, the implementation of which will undoubtedly take a long time.